There is always room for improvement for 401(k) plans

While the majority of eligible employees participate in 401(k) plans, there is still room for improvement. That’s the word from Bank of America, which has released its 2022 Financial Life Benefits Impact Report.

Based on proprietary data from 3.1 million participants in the financial company’s employee benefits programs, 58% engage with 401(k) savings. That said,  61% of contributing employees contributed less than $5,000 in 2021, and fewer than 1 in 10 contributed at the allowable 402(g) limit.

Related: Which industries have the most thriving 401(k) plans?

“As one of the largest providers of workplace benefit programs, Bank of America has a unique view into the trends affecting employers and employees today,” notes Lorna Sabbia, the company’s head of retirement and personal wealth solutions. “Using our participant data, we’ve identified a number of trends that we are using to inform how we develop new innovative ways to serve our clients and their employees.”

While the report indicates employers are broadening their financial wellness programs with more services, Sabbia adds that “significant work is still needed to increase employee utilization of these benefits.”

Here are five key findings of the report:

• Millennials are not leveraging the full potential of 401(k) benefits. 

Millennials are the least likely to participate in a 401(k) plan (54% vs. 65% of Gen X and vs. 59% of baby boomers). What’s more, 70% contribute less than $5,000 annually — significantly higher than Gen X (54%) and baby boomers (51%). And only 4% are contributing at the allowable 402g limit (vs. 12% of Gen X and vs. 14% of baby boomers).

• Automatic features drive positive 401(k) engagement.

Employee participation rates more than double when plans have an auto-enrollment feature. Most (90%) use a default rate of 3% or higher, while only 30% of plans use a default rate of 5% or higher.

• Gen Z women are closing gender gaps in 401(k) balances.

Only 55% of women participate in 401(k)s (vs. 62% of men), and men have 55% more in 401(k) balances ($108,000 vs. $70,000). However, Gen Z women have overtaken Gen Z men in total retirement savings, with 3% higher account balances on average.

• Target date funds (TDFs) remain an attractive option. 

When offered to employees, more than 4 in 5 invest in TDFs, with 59% investing all of their assets in TDFs. Millennials invest almost twice as much money in TDFs boomers.

• More employees are investing some of their Health Savings Accounts (HSA) assets. 

HSA usage of the investment component of their account increased by up to 3% across all generations year over year. Twenty-six percent of employees contributed more than they withdrew, with the average account balance among Bank of America participants at $4,356 (up 23% since 2020).